Standard & Poor's Holds Firm on Chicago Public Schools Rating

CHICAGO - The Chicago Board of Education won't face a rating hit from Standard & Poor's as Chicago's city government did after losing its investment grade credit from Moody's Investors Service.

Standard & Poor's said Tuesday it continues to monitor the impact of the Moody's downgrade, which put Chicago schools at Ba3, but said the board of education doesn't face the face the same potential liquidity crisis as Chicago did after it was dropped to junk last month.

Standard & Poor's rates Chicago Public Schools' $6.2 billion of debt A-minus with a negative outlook, after a two-notch downgrade in March citing pension and budget woes. Standard & Poor's hit Chicago recently with a two-notch downgrade to A-minus after Moody's downgraded the city to Ba1.

"Our concern about the impact on the board's finances and debt is ameliorated by the fact that no bank facilities are affected, and that the board is already taking steps in response to the possible termination of its interest rate-swaps following downgrades in March 2015," Standard & Poor's wrote.

The board has shed through refundings its publicly offered floating-rate debt so has no liquidity facilities or letters of credit. There are no terminations tied to rating levels on its tax anticipation notes or privately placed debt.

Previous downgrades by Moody's and Fitch to below a BBB rating level triggered interest-rate swap terminations allowing banks to demand payment from the school district on swaps negatively valued at about $228 million. The board remains in negotiations with swap counterparties to amend the terms and avoid "having to make immediate full termination payments," Standard & Poor's wrote.

If forced to pay the banks, the district could tap $174 million in a debt stabilization fund or other cash in various funds. The board had unrestricted cash of $71 million at the close of its last fiscal year and has access to $500 million in bank lines of credit.

"While we continue to view the possible termination payments as pressuring the district's budget, we do not view these payments as likely to cause a liquidity crisis at present," the rating agency said. "The possible loss of so much of cash and operating reserves to cover swap termination payments would put even greater pressure on the board as it structures and manages its fiscal 2016 budget in the face of a gap of $1 billion."

The current rating level is conditioned upon the board's ability to maintain adequate unrestricted reserves. The district has not yet unveiled its fiscal 2016 budget or said how it will tackle a $1.1 billion deficit driven in large part by its pension contributions that will rise to $700 million.

On Monday, the district and Chicago Mayor Rahm Emanuel's office announced the resignation of schools' chief Barbara Byrd-Bennett who is being probed by federal authorities for her role in a no-bid contract given to a firm she used to work for that trains principals.

On Tuesday, Emanuel announced his picks for four board slots. They include Gail Ward, a former CPS teacher, principal, and administrator; Rev. Michael Garanzini, a university administrator; Dominique Jordan Turner, head of Chicago Scholars Foundation; and Mark Furlong, retired chief executive officer of BMO Harris Bank. They replace Carlos Azcoitia, Henry Bienen, Deborah Quazzo and Andrea Zopp, whose terms expire this month.

The district's fiscal pressures are mounting with a $634 million payment due to the teachers' fund at the end of the fiscal year June 30.

On Tuesday, Emanuel would not comment on whether the district can make good on the payment. "There's no doubt the finances are challenging," Emanuel said when asked by reporters at a public event. "My whole goal is to now work with the state and make sure that the financial challenges do not undermine the hard work that our teachers, our principals, our parents and our students are doing academically at CPS."

The General Assembly adjourned without providing the city and district with any form of relief. Gov. Bruce Rauner recently suggested the district was a candidate for Chapter 9 if the state added such a law.

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